The Portfolio Selection Model of Oil/Gas Projects Based on Real Option Theory.

Portfolio selection of oil/ gas projects is a fundamental subject of capital budgeting in the energy sector. In industry, strategic planning requires the selection of a portfolio of projects to advance the corporate goals. The term portfolio selection is more devoted to a set of financial assets that are easily traded and divisible. The principles and fundaments of portfolio selection can be used to compare strategies of investments, so that firms get maximum returns. In this paper, we discuss the oil/gas projects valuation methods first. Considering the characteristic of the oil/gas project, Real options method is more suitable for the oil/gas project than NPV method, and then a new model extended from the Black-Scholes model is built up. Finally, this paper put forward the portfolio selection model and gives a Computational case. [ABSTRACT FROM AUTHOR]